China's intervention in CNH narrows CNH-CNY spread

A sharp move lower in the CNH rate indicates strongly that China has today intervened in the off-shore market. This is quite unusual as China mainly intervenes in the on-shore market (CNY), as has been the case lately. USD/CNH has declined today from 6.47 to 6.38 (at 14.20 CET), a decline of 1.4%.

China is intervening to narrow the spread between the CNH and CNY, which widened sharply following the FX reform announced on 11 August. This follows a specific goal to have the same rate for CNY, CNY reference rate and CNH, as this was a concrete request from the IMF for China to be accepted in the SDR. Whether China is included in the SDR will be decided at the end of the year.

Ahead of the reform of the FX system on 11 August, China had a gap between the CNY fixing and the CNY spot rate whereas the CNY and CNH were fairly close to each other. However, in response to the demand from the IMF, China changed its system on 11 August to make the CNY reference rate based on the market rate the prior day. This has closed the gap between the CNY spot and the reference rate.

However, at the same time the spread between CNH and CNY widened due to depreciation pressure on the yuan. The PBoC has intervened in the CNY market to keep it from weakening further but USD/CNH stayed at a higher level as no intervention supported the CNH in this market . In order also to close the gap between the CNY and the CNH China is now apparently intervening in the off-shore market. According to newswires this is taking place through Agency banks in London and Hong Kong.

"The move today is a clear signal that China is determined to reach the goal of only one FX rate with CNY and CNH trading at the same level - or at least only with a very small spread. We believe China will continue to use intervention to achieve this goal as it is very determined to be included in the SDR",says Danske Bank.